Participating Life Insurance

Owners of participating life insurance receive dividends from the insurance company.  Either term life insurance or whole life insurance may be “participating.”

Dividends

When survival is higher than anticipated among a sample of insureds, the insurance company incurs a lower mortality cost (i.e. it pays less in death benefits).  Then the company has less need for clients’ premiums, so it returns the unused portion of each participating policyholder’s premium in a dividend.

The dividend is considered a partial refund, so it is not taxable as income.

Dividend options

Your insurance company will offer several formats in which to receive your dividend.  For instance, you may have your dividend pay directly into your cash value, you may apply it against future premiums, or you may even take it as a cash payment.

One popular dividend option is “paid-up insurance.”  To wit, each dividend buys a little bit more insurance coverage and pays its entire future cost.  Thus it increases your policy’s death benefit but not your future premiums.